Dynamic information spillover between Chinese carbon and stock markets under extreme weather shocks

The present study aims to investigate the dynamic information spillover relationship between Chinese carbon and stock markets, as well as the impact of extreme weather shocks exerted on this relationship. The method adopted is the least absolute shrinkage and selection operator–vector autoregressive–Diebold-Yilmaz spillover approach so that the degree and direction of risk spillovers among markets can be assessed simultaneously. Empirical results reveal that there is a high level of extreme risk spillover among markets in comparison to return spillover. The carbon market receives return spillover from high-polluting sectors, but it will turn into a risk transmitter under extreme risk conditions. Weather shocks significantly affect extreme risk spillover among markets and may lead to spillovers from the carbon market to low-polluting sectors. The portfolio strategy constructed based on the identified information spillover relationship is shown to achieve higher average returns than strategies focusing on a single carbon or stock market sector. This paper is among the first to integrate carbon markets and 38 stock sector indices for different pollution intensities, comprehensively exploring their dynamic interrelationships under extreme weather threats. The corresponding practical and policy implications for investors and regulators are also provided along with these findings.